Navigating Supply Relationships in the Turbulent World of Coronavirus Disruption
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Navigating Supply Relationships In The Turbulent World Of Coronavirus Disruption by John T. Shapiro A FREEBORN & PETERS LLP WHITE PAPER ABOUT THIS WHITE PAPER Businesses throughout the globe that rely on or service supply chains are experiencing COVID-19’s disruptive impact. The altered marketplace should prompt your company to take proactive steps to manage the disruption to its supply relationships. This White Paper highlights key issues and strategies you can use to protect your company The ongoing COVID-19 (“coronavirus”) How should your company assess and and its supply relationships. pandemic is having an unprecedented manage supply relationships and navigate adverse impact on trade and commerce. existing and future disruption caused Businesses throughout the globe by the coronavirus? No one-size-fits- supply chain dynamics and experienced that rely on or service supply chains, all solution exists. But, a mix of three at helping to resolve disputes between whether simple or complex, domestic primary considerations will allow your supply partners. or international, are experiencing the company to better control its fortune pandemic’s disruptive effect. even where current-day realities render This White Paper highlights key issues for supply relationships uncertain and more use by your company’s team in protecting Purchasers and suppliers of goods and difficult to maintain and manage: the company and its supply relationships services are assessing their rights and 1. Understand your company’s existing in the turbulent global marketplace the obligations toward one another. In supply agreement rights and coronavirus pandemic has created. determining its strategy for addressing obligations disruptions, it is important for your 2. Nurture current supply relationships Step 1: Assess Your Company’s company to keep in mind that it may 3. Heed lessons learned in forming and Contractual Rights and Obligations be both a purchaser and supplier in the managing future supply relationships The altered marketplace should prompt same supply chain. Actions your company Each consideration is complex. For and embolden companies to take may take as a purchaser in response to many companies, efficient and effective proactive steps to manage the business a supply partner’s inability to fulfill a assessment, relationship management, and legal consequences of disruption supply obligation may be taken against and synthesis and application of lessons to their supply chains and relationships. the company in its capacity as a supplier learned to future company operations and Rote reliance on trust placed in supply if it is unable to fulfill obligations to a relationships will require a team approach. partners to offer a remedy is foolhardy. subsequent purchaser of the company’s This includes seeking input from and the Proactive management starts with products. assistance of legal counsel familiar with understanding your company’s rights and obligations so that your company can design and implement the inclusion of a force majeure clause in the parties’ supply an informed strategy. Considerations that inform decision- agreement may supersede application of an alternative theory, making regarding supply chain rights and obligations include: even if the force majeure provision does not apply to the particular cause of the disruption, the notion being that the Identify Governing Agreements and Law. Your company’s parties specifically allocated risk of the type of disruptions assessment of its supply relationship rights and obligations that would relieve performance. Therefore, your company starts with review and understanding of relevant supply should assess each potential avenue for relief under the agreements. This review should take into account the governing law in determining—and before implementing—its particular law that governs interpretation of each agreement strategy for addressing its inability to comply with its supply and relationship. Governing law may differ with respect to or purchase obligations. particular upstream and downstream parties in a supply chain and compel different strategies for different partners of your Identify and Maintain Evidence. It is important for your company within the same supply chain. company to keep in mind that each potential theory for relief from non-performance sets a high, fact-intensive bar Identify and Analyze Potential Legal Theories that may for partaking. Courts and other tribunals typically construe Afford Relief. No doubt, numerous companies that are unable each legal theory narrowly. Identifying relevant facts is vital to fulfill their obligations as a result of the coronavirus hope to assessing which legal theories support your company’s to claim the pandemic as a force majeure event, provided a situation. So too is maintaining evidence that reflects those force majeure clause is included in their supply agreement. facts, especially if your company subsequently has need to The purpose of a force majeure clause is to excuse prove an applicable defense or justify particular conduct. nonperformance where circumstances beyond the control of Because it is reasonable to anticipate a dispute will ensue, the parties thwart contract compliance. your company should implement a hold on information that relates to the disruption and the remedy your company Whether a supply disruption caused by the coronavirus implements. pandemic will constitute a force majeure event that excuses performance will depend on the particular wording of the If your company’s supply partner declares that a force force majeure clause. Where a clause includes terms such as majeure or another legal theory relieves it of its obligation to “pandemic” or “government act in response to an emergency,” supply the company or purchase its products, your company a company is more likely to be in a position to assert that the should not simply accept its partner’s word for it. Rather, your coronavirus is a force majeure event that excuses its non- company should ask its partner for evidence of its inability to performance. The World Health Organization has declared the supply or purchase and its efforts to mitigate the disruption. coronavirus a pandemic. And, governments around the world Further, if that supply partner’s inability to supply causes the have declared their own emergencies and have implemented company’s own inability to supply product to another supply quarantines, stay-in-place orders and other measures to stem partner, your company should be careful to document that the virus’ spread that have the effect of disrupting supply impact. chains. Consider Impact of Remedy on other Obligations and In the absence of a force majeure clause altogether or a force Aspects of Operations. The strategy assessment should majeure clause that does not encompass a coronavirus-related include consideration of other clauses in the supply disruption, other performance-relieving legal theories may agreement and other agreements, such as financing apply, including under common law, such as impracticability, agreements, that may be impacted by a declaration of impossibility and commercial frustration, the Uniform force majeure or notice of other remedy. In addition, the Commercial Code and the U.N. Convention on the Sale of assessment should include review of insurance policies to Goods. Generally, these avenues for potential relief consider determine whether your company is covered for losses whether an unexpected, intervening event occurred, the non- arising out of direct interruption of its operations as well as occurrence of the event is a basic assumption of the contract, disruption to the company’s supply chain, including failures of and the event makes performance impossible or impractical or upstream suppliers or downstream customers to comply with it obviates the purpose of the agreement. contractual obligations to the company. Insurance coverage for losses related to supply chain disruption may impact the As with the law on force majeure, your company must be strategy your company ultimately implements. weary of legal generalizations and mindful of the numerous permutations to these alternative legal theories, some jurisdiction specific. In the same vein, in some jurisdictions A Freeborn & Peters LLP White Paper 2 Mitigate the Impact of Disruption. Your company also should the event allows the company to permanently alter the assess its ability to mitigate disruption to its performance, supply agreement terms or terminate the supply relationship even if mitigation results in a greater cost to the company. altogether. Typically, additional cost to comply with a supply obligation alone does not excuse non-performance. But, careful review Be Mindful of Notice Requirements. A supply agreement or of the supply agreement, underlying facts, and governing law governing law may require that your company provide its may reveal a viable argument that additional cost to comply supply partners with prompt notice of a disruptive event. is a hardship that is encompassed by the force majeure clause Failure to provide prompt and adequate notice, in some cases or other legal theory. Moreover, even if efforts to mitigate are within a particular time frame, may result in waiver of the not successful, your company’s efforts nevertheless would right to rely on the force majeure clause or other legal theory. be relevant to its declaration of force majeure. First, your Therefore, your company’s strategy assessment must be done company would satisfy a mitigation